Emerging trends in Indian Family offices

One of my biggest challenges is to explain to people what I do. When I say I run a family office, there is a polite smile and more often than not a vacant and blank look on people's faces about - just what is a family office? For those of you who may not have come across this terminology before, a family office is a private wealth management advisory firm that serves ultra-high-net-worth families. They are different from traditional wealth management firms in that they offer a total solution to managing the financial well-being of an affluent individual or family, be it investments, legacy planning or philanthropy.

In India, UHNW families are defined as families with investible financial assets of more than $50 million. These business families have created wealth through a combination of favourable economic conditions and hard work. Over the next decade, India will witness the transition of $128 billion of assets from one adult generation to the other. With each new generation, the size of the family increases and so does the risk associated with potential gains and losses in the business.

Having witnessed this globally, Indian UHNW families realise that on an average, it takes just three generations for wealth dilution, conflict over succession and economic recession to destroy a fortune. It is in this very context that families are recognising that to preserve the family wealth for successive generations, they need to plan their legacies. One way that a family addresses these complex and sensitive issues is by setting up of a family office.

A family office is a company run by a group of professionals to help safeguard the family's legacy. Their mandate is to work with multi-generational family members in areas related to investment management, business succession, wealth structuring, inheritance, educating the next generation and philanthropy. The key pillars on which a family office delivers on this mandate is through a good governance framework and prudent risk management. Succession is a complex issue and a family office can help to ensure a successful transition of the family business.

Family 0ffices are of two types. In its purest sense, a single family office (SFO) is a private company that manages the financial affairs of a single family. A multi-family office (MFO) on the other hand manages the financial affairs of multiple families, who are not necessarily connected to each other. MFOs are a more recent phenomenon in India. They can provide enormous value to families as MFOs provide the same benefits as an SFO but at lower costs, since they bring economies of scale to the management of the family office.

According to the Credit Suisse Global Wealth Report 2015, the number of UHNW families in India is estimated at approximately 2,100. A fairly large percentage of these individuals are first- and second-generation entrepreneurs who during the years of setting up and operating their businesses had their wealth managed by banks. Typically, the wealth would be spread across multiple service providers with no long-term planning for the family's legacy. This has changed, with UHNW families seeking holistic solutions that reflect the family's long-term values and priorities. In most families it is the second and third generations that are at the forefront of driving a more process-driven approach to succession and to preserving the family legacy. Interestingly, philanthropy is playing a big part in these discussions. All of this stems from a more global perspective and outlook of the next generation; and a keen awareness on how legacy for family owned businesses is being preserved in more developed markets.

Globally, the family office space is characterised by three emerging trends - a growing number of UHNW clients around the world, especially in the Asia-Pacific region; more affluent families seeking out experienced professionals to manage their wealth to fit their specific financial goals and risk tolerances; and families demanding holistic, professional and customised services to help them in their succession.

It is estimated that there are approximately 4,000-5,000 family offices across the world, of which only 3-5 per cent are housed in Asia-Pacific, suggesting a significant growth potential over the next five to ten years for the family office format of wealth management services in the region.

Over the next three years, the way we manage wealth for a UHNW family will see a shift from traditional wealth management options and this will gather momentum for several reasons. Family offices can provide coordinated and holistic services and solutions to families. A family office structure ensures that there is a better alignment of interest between financial advisers and the family. Through the centralisation and professionalization of asset management activities, family offices are more likely to achieve higher returns and lower risk on their investment decisions. Better governance and management helps the family deal with wealth transparently to avoid future conflicts. Family offices ensure confidentiality and lastly, through a network effect, MFOs connect like-minded families. By acting as a central financial management solution, a family office meets all the financial needs of the family, and serves as a central source of information and advice for all the family members on their financial well-being.

The writer is Managing Director & CEO, Waterfield Advisors